New pension system
The next few years will see quite some changes in the Dutch pensions world. The most important of these is the new Future of Pensions Act [Wet toekomst pensioenen], which comes into force on 1 July this year. You won’t see many changes in the short term because unions, employers and pension funds have until 1 January 2028 to bring their pension plans into line with the new legislation. As well as changes in the pension system itself, participants will be entitled from 1 January 2024 to have amounts paid out as a lump sum.
What exactly is going to change?
Recent years have seen very few increases in most people’s pensions. In the new system, by contrast, there will be more opportunities to use investment returns to increase pensions. But in an economic downturn, pensions can also be reduced. But pension funds will have to have buffers in place to absorb such fluctuations.
The new legislation will also mean pension funds have to make it clearer how much pension a participant has built up. Pensions consist of all the contributions that have been paid plus the returns from investing them. Another important change is that whatever age employees pay contributions, their contributions will be for the benefit of their own pension. This is unlike the current system, where participants build up most of their pensions towards the end of their careers. A disadvantage of this current system is that losing or changing your job towards the end of your career has major consequences. As far fewer people now spend their whole career working for one employer, the new legislation will tie in more with today’s reality.
What’s going to stay the same?
The new legislation isn’t going to change everything. Employees will still build up pensions in a group plan and share financial risks with each other. And employers and employees will both carry on paying contributions. Pension administrators will also continue investing these contributions and ultimately arranging to pay out pensions that have been built up.
Lump Sum Payments Act
From 1 January 2024, pension plan participants will be able to opt for part of their pension to be paid as a lump sum. The Lump Sum Payments Act was originally intended to take effect on 1 July 2023, but has been postponed to 2024. From then on, all pension funds and pension fund insurers will have to allow lump sum payments.
What does the Lump Sum Payments Act mean?
From 1 January 2024, participants can choose to receive part of their pension as a lump sum. But that will reduce the rest of their pension. Opting for a lump sum may be attractive if, say, you want to pay off your mortgage or use part of your pension to travel. The following conditions apply to lump sum payments:
- The lump sum is for a maximum of 10% of the pension
- The amount can only be paid out on a person’s pensionable date
- Lump sum payments cannot be combined with arrangements allowing a higher and then a lower pension (or the other way around)
- The pension left after the lump sum payment must be above the commutation threshold for small pensions.
